The Patient Protection and Affordable Care Act: An Overview of Its Potential Impact on State Health Programs

The Patient Protection and Affordable Care Act: An Overview of Its Potential Impact on State Health Programs M AC TAy lo r • l e g i s l A T i v e A n A l y s T • M Ay 13, 2 010 an LaO RepORt 2 LegisLative anaLyst’s Office an LaO RepORt ExEcutivE Summary The Patient Protection and Affordable Care Act (PPACA), often referred to as federal health care reform, is far-reaching legislation that will change how millions of Californians access health care coverage. The scope of PPACA is so broad that it will be years before all of its pro- visions will be fully implemented and its ramifications fully understood. Overview of PPACA The PPACA intends to make coverage more accessible and in order to do this it does the following: ➢ Creates an Individual Mandate. Imposes an individual mandate requiring most U.S. citizens and legal residents to have health insurance coverage or pay a penalty. ➢ Establishes American Health Benefit Exchanges. In order to make coverage more ac- cessible and affordable, PPACA creates new entities called American Health Benefit Exchanges through which individuals who generally do not have access to affordable employer coverage, as well as small businesses, can purchase coverage. ➢ Changes Private Health Insurance Coverage. The PPACA establishes new requirements for health plans and insurers designed to expand access to affordable coverage, and prevent individuals from losing coverage. ➢ Expands Medicaid. The PPACA significantly expands the Medicaid program (known as Medi-Cal in California) primarily by mandating coverage of certain population groups not previously required—such as low-income, childless adults. ➢ Establishes New High-Risk Insurance Pool. The PPACA establishes a federal high-risk health insurance coverage pool program to provide coverage to individuals who are unable to purchase coverage and who are commonly referred to as hard-to-insure or medically uninsurable. Implications for State Health Programs in the Near and the Long Term Some of PPACA’s provisions are already in effect, while others will go into effect in the near term. In some cases, the state will need to react quickly in order to take full advantage of chances to improve state health care programs and to obtain federal funds the state needs to help carry out the new law. Other provisions of PPACA will not go into effect for two or three years or more. Nevertheless, in a number of cases, it will be important for the Legislature to be- gin considering soon what initial steps should be taken to implement some of these measures. For example, based on our initial review, the PPACA will substantially increase future health LegisLative anaLyst’s Office 3 an LaO RepORt program costs that the Legislature should begin planning now to address. Some new grant and program opportunities are available that could generate additional federal funds to support activities to improve health outcomes in California. Other significant programmatic changes will be needed to help establish the new programs called for in the federal law, to integrate them with existing state health programs, or to comply with federally mandated eligibility and enroll- ment processes. Thinking Broadly About Implementing the New Federal Law Beyond responding to the specific requirements in PPACA, the Legislature should think broadly about the state’s role in the implementation of expanded health insurance coverage over the next few years. In carrying out and adapting to PPACA, for example, the Legislature has the opportunity to improve the structure of the state’s patchwork of state programs. We believe the Legislature should consider the following issues: ➢ Address Future Health Care Costs. We think the Legislature should consider addressing future health care costs by: (1) maximizing receipt of federal funds, (2) leveraging the state’s purchasing power, and (3) reducing the cost of care for high-cost individuals. ➢ Structural Changes to State Programs Are Warranted. We believe that PPACA provides an opportunity for the Legislature to reexamine the structure of the state’s health pro- grams going forward. ➢ The PPACA Should Prompt a Reevaluation of the State-Local Partnership. In light of the interactions between local government and state programs, it will be critical for the Legislature to reassess the state and local relationship as part of its deliberations on the implementation of PPACA. ➢ New Strategies Could Bolster Health Care Quality and Outcomes. The PPACA does not make dramatic changes to the health care delivery system, however, it makes avail- able grants and demonstration project opportunities to assist states in addressing certain problems in a gradual manner. ➢ Future Workforce and Health Infrastructure Needs Should Be Assessed. The indi- vidual mandate and expanded coverage options created under PPACA will likely create a surge in demand for health care services statewide. Successful implementation of PPACA will depend on the state’s response to access issues including workforce and infrastructure capacity as well as the regional variation of supply of health services. 4 LegisLative anaLyst’s Office an LaO RepORt introduction The PPACA, as amended by the Health Care This report begins by providing a broad over- Education Reconciliation Act of 2010, is far- view of PPACA and its key elements, such as the reaching legislation that will change how millions establishment of health benefit ”exchanges,” the of Californians access health care coverage. The expansion of publicly funded health programs, PPACA, often referred to as federal health care and other major changes to the health care sys- reform, will also change the structure and avail- tem. We subsequently explore both the impor- ability of coverage, thereby making it easier for tant short- and long-term implications of PPACA more Californians to purchase and maintain it. for the state’s array of health programs, including The scope of PPACA is so broad that it will the potential multibillion dollar annual cost of be years before all of its provisions will be fully these federal mandates to the state. In this report, implemented and its overall ramifications fully we have focused on the implications of the new understood. Furthermore, the federal govern- law for the state’s public health care programs, ment will promulgate regulations over the next but PPACA also has broad policy impacts in few years that will clarify PPACA and give more other areas. (See the text box on the next page detailed guidance on how many of its provisions for a discussion of these other impacts.) Finally, are to be implemented. The California Legislature we encourage the Legislature to think more has already begun taking steps to develop legisla- broadly about the opportunities PPACA provides tion that would enact various specific provisions the state to improve the financial sustainability of PPACA into state law, as well as proposing and structure of the state’s health programs and broader measures intended to help guide the improve health care quality and outcomes. state’s implementation of PPACA. ovErviEw of thE nEw fEdEral hEalth carE law PPACA I M H some subsidies to encourage the expansion of ntends to Ake eAltH C M A employer-based coverage. overAge ore CCessIble To make coverage more accessible for low- In order to make coverage more acces- and modest-income individuals and families, the sible and affordable, PPACA creates new enti- federal law contains provisions limiting the pre- ties called American Health Benefit Exchanges, miums and lowering cost-sharing obligations such through which individuals and small businesses as copays and deductibles that can be charged to can purchase coverage. A few years after these those who purchase coverage. The PPACA also exchanges are established, they can be opened imposes various new standards on health insur- to allow purchases of coverage by larger employ- ers. For example, the law requires insurers to offer ers. The PPACA places requirements on certain and renew coverage on a guaranteed issue basis, employers to provide coverage, and provides LegisLative anaLyst’s Office 5 an LaO RepORt meaning that an insurer must accept every appli- California). The new federal law also establishes cant for coverage with certain exceptions. a temporary high-risk insurance pool that will al- The PPACA provides low-income persons low persons with preexisting medical conditions greater access to health coverage by expanding to purchase coverage. the Medicaid program (known as Medi-Cal in M W H s P I eAsure ould Ave WeePIng olICy MPACts The scope of this report is mainly limited to a discussion of the effect the Patient Protection and Affordable Care Act (PPACA) will have on state health programs, due to the immediacy of many changes in this area and the major fiscal implications of the new federal law for these programs. However, PPACA’s impact will reach far beyond state health programs and include: ➢ Workforce Development. As access to health care coverage expands to new popula- tions, the demand for health care services will increase. It will be important to assess whether the current and projected size of the health care workforce, including for particular types of clinicians and for particular regions, will be sufficient to meet this de- mand. Some federal funds will be available for states and other entities to expand their health care workforce—including student loan repayment and forgiveness programs as well as grants for enhanced training programs for a variety of health care professionals (such as nurses and social workers). ➢ Health Insurance Oversight and Regulation. New health insurance oversight require- ments may create additional workload for the Department of Insurance and the De- partment of Managed Health Care. The Legislature will need to carefully consider how its statutes and regulations governing health insurers and health plans align with these new federal rules as well as the standard packages of benefits that are to be offered to individuals participating in the health benefit exchange. ➢ Federal Tax Changes and State Revenue Impacts. The PPACA imposes various taxes and penalties that may have an impact on businesses and individuals. These changes, as well as the expansion of health coverage could have significant implications for the state tax system and revenues. For example, as more persons obtain coverage and pay premiums, state insurance premium tax revenues could increase. ➢ State Employee and Retirement Benefits. Various provisions of PPACA, including some important changes to the federal Medicare program, may impact the costs of providing state employee and retiree health benefits. The impacts identified above are not analyzed in this report. However, we intend to exam- ine many of these impacts in the future, and, in many cases, recommend approaches that the Legislature may wish to consider to address these matters. 6 LegisLative anaLyst’s Office an LaO RepORt k P Health Insurance Exchanges ey rovIsIons of tHe n f l eW ederAl AW Simplifying the Purchase of Coverage. The As outlined above, PPACA is designed to cre- primary function of the exchange is to make ate a health coverage purchasing continuum that coverage accessible and to simplify the process is accessible to persons with low, middle, and of obtaining it. United States citizens and legal high incomes. As individuals’ incomes rise and immigrants who generally do not have access fall, as they become employed, change employ- to affordable employer coverage can use the ers and become unemployed, and as they age, exchange to obtain coverage. Additionally, small they are to have access to different sources of businesses with fewer than 100 employees can coverage along the coverage continuum. The use the exchange to obtain coverage for their PPACA also seeks to impose greater standardiza- employees. Prior to 2016, states can limit ex- tion on the coverage that is offered. Creating this changes to businesses with up to 50 employees. continuum requires the modification of existing Beginning in 2017, states can allow any business health programs with new programs, and inte- to purchase coverage from the exchange. One gration of these programs with new programs recent study estimates that by 2016 up to 8.4 mil- created by PPACA. Below, we describe in more lion individuals in California would be eligible detail the key elements of PPACA that are intend- to participate in the exchange, even if employers ed to establish the health coverage purchasing with over 100 employees are not included. continuum. The major functions of the exchanges are to: ➢ Certify Health Plans. The exchanges will Individual Mandate to Obtain Coverage certify the “qualified health plans” that The PPACA imposes an individual mandate will be offered through the exchange. requiring most U.S. citizens and legal residents Certification will be based upon the to have health insurance coverage or pay a plan’s ability to meet federal require- penalty. There are exceptions to this require- ments regarding: (1) benefit design; ment for financial hardship, religious objections, (2) marketing practices; (3) provider net- American Indians, those without coverage for works, including community providers; less than three months, incarcerated individuals, (4) plan activities related to quality im- and certain low-income individuals. Beginning provement; and (5) the use of standard- January 1, 2014, a penalty for not having cover- ized formats for consumer information. age will be phased in over three years and will ➢ Maintain Consumer Access to Informa- be calculated based on a specified percentage of tion. Each exchange is to maintain an a person’s taxable income. In order to make cov- Internet website through which individual erage widely available so that people can comply consumers may obtain comparative with the new mandate, PPACA makes sweeping information on participating health plans. changes to how health insurance coverage will They will also operate a toll-free tele- be offered and purchased. phone hotline to respond to requests for assistance. LegisLative anaLyst’s Office 7 an LaO RepORt ➢ Perform Premium Reviews. The ex- flexibility in the design of the exchange. For exam- changes will review the premiums that ple, the exchange may be operated by a state en- are being charged by health plans to tity or a nonprofit entity established by the state. determine whether the plan should be States may choose to operate regional exchanges, made available through the exchange. or to share an exchange with one or more other states. Additionally, within certain limits, states ➢ Outreach and Exemption Functions. have the choice of providing a single exchange Individuals who contact the exchange will for individuals and businesses, or establishing a be provided information on various pub- separate Small Business Health Options Program lic health coverage programs as well as exchange for qualified employers. the plans avail- able through the Figure 1 exchange. The Health Benefits Offered Through the Exchange exchanges will also establish a “naviga- Uniform Benefits Package: Qualified health plans are required to offer a uni- tor program” to form benefits package as defined by the secretary of the federal Department of Health and Human Services. At a minimum, the package must include the fol- conduct outreach lowing “essential health benefits”: and facilitate en- • Ambulatory patient services rollment in quali- • Emergency services • Hospitalization fied health plans. • Maternity and newborn care They will certify • Mental health benefits whether certain • Substance use disorder services • Prescription drugs individuals qualify • Rehabilitative and habilitative services and devices for an exemption • Laboratory devices from the individ- • Preventive and wellness services • Chronic disease management ual mandate and • Pediatric services, including oral and vision care determine when Levels of Coverage: In general, qualified health plans must offer various plans employers are sub- based on the portion of the health care costs that would be covered by the plan. • Bronze: 60 percent of actuarial value ject to penalties for • Silver: 70 percent of actuarial value failing to provide • Gold: 80 percent of actuarial value coverage to their • Platinum: 90 percent of actuarial value Catastrophic Plan: A plan covering all of the essential benefits, as well as a mini- employees. mum of three primary care visits for individuals under the age of 30 (as well as certain individuals exempt from the individual mandate) once a certain level of Figure 1 provides cost sharing is reached. more detail on the health Child-Only Plan: Any qualified health plan offered under the exchange must also be available as a plan available only to individuals who have not attained the benefits offered through age of 21. the exchange. Annual Cap: May not exceed the cost sharing for high-deductible health plans in How Will the Ex- the individual market in 2014 (currently $5,950 individual/$11,900 family). The limitation on cost sharing is indexed to the rate of average premium growth. changes Be Structured? Deductibles: For plans in the small group market deductibles are limited to States have significant $2,000 individual/$4,000 family, indexed to average premium growth. 8 LegisLative anaLyst’s Office an LaO RepORt Implementation Timelines and Funding. Employer Requirements Federal law requires the establishment of the Under PPACA, employers are not directly exchange no later than January 1, 2014. If a state required to offer coverage to their employees. chooses not to establish an exchange, the federal However, the measure contains strong incen- government may establish and operate an ex- tives for many of them to do so. Beginning in change within the state. The federal health care 2014, large employers (defined as those with at reform law establishes “planning and establish- least 50 full-time employees during the preced- ment grants” to states. The secretary of the federal ing calendar year) will face financial penalties if Department of Health and Human Services must one or more of their full-time employees obtain award these grants to states no later than one year a premium credit through an exchange. Full-time after enactment of the act, with the funding avail- employees are defined in the new federal law as able until January 2015. Thereafter, the exchange those working 30 or more hours per week, ex- is required to be self-supporting through adminis- cept that full-time seasonal employees who work trative fees charged to participating insurers. for less than 120 days during the year are exclud- ed. If the employer does not offer coverage to its Subsidies to Low-Income Persons workers, or if the employer offers coverage that To Obtain Coverage is not affordable based on PPACA standards, an The PPACA provides several forms of finan- employee may be eligible for a premium credit cial assistance to low- and moderate-income that would trigger a penalty on the employer. persons to help them to obtain coverage. For Employers that provide coverage will be example, the PPACA generally extends Medicaid required to provide a “free choice” voucher to coverage to persons with incomes up to 133 per- low-income employees that meet certain require- cent of the federal poverty level (FPL). In addi- ments to enable them to enroll in a plan offered tion, citizens and legal residents with incomes through an exchange. Employers that offer cover- between 133 percent and 400 percent of the age and have more than 200 employees will be FPL are eligible for a federal premium subsidy required to automatically enroll their employees to help them to purchase coverage through the in the company’s health plan, although employ- health benefits exchange. Persons with incomes ees can subsequently opt out of the employer’s up to 250 percent of FPL will also be eligible for coverage. reduced cost sharing, such as lower deductibles and copayments, with the amount of the reduc- Changes in Private Health Insurance tion varying based on their income. Persons who Coverage Practices are offered coverage through their employer The PPACA establishes new requirements for also may be eligible for the subsidies provided health plans and insurers designed to expand ac- through the exchange. However, they are only cess to affordable coverage and prevent individu- eligible to receive them if their employer’s plan als from losing coverage. The requirements are fails to meet certain specifications or if the pre- phased in over time as referenced below. The mium would exceed 9.5 percent of the employ- major changes include: ee’s income. LegisLative anaLyst’s Office 9 an LaO RepORt ➢ Guaranteed Availability of Coverage. and tobacco use. In effect, this provision An insurer must accept every employer prohibits insurers from charging persons and individual in the state that applies for with certain medical conditions more coverage, permitting annual and special than others for coverage. (Effective Janu- enrollment periods for those with qualify- ary 2014.) ing lifetime events (such as a change in ➢ No Lifetime or “Unreasonable” Annual marital status). This is sometimes referred Limits. A group health plan and insur- to as a “guaranteed issue” requirement. ance issuer offering group or individual (Effective January 2014.) health insurance coverage may not es- ➢ No Preexisting Conditions, Exclusions, tablish lifetime limits on the dollar value or Refusals Based on Health Status. of benefits or unreasonable annual limits No group health plan or insurer offer- on the dollar value of benefits. (Effective ing group or individual coverage may September 2010.) exclude anyone based on a preexisting ➢ Coverage of Preventive Health Services. medical condition or refuse to cover per- Plans must provide coverage for certain sons due to past illness. (Effective January preventive health services, such as immu- 2014.) nizations, without cost sharing. (Effective ➢ Prohibition on Rescissions and Guar- September 2010.) anteed Renewability. Insurers will not ➢ Comprehensive Health Insurance Cover- be permitted to rescind health coverage age. The new federal law requires health once the enrollee is covered under the insurers in the small group and individual plan, except in cases of fraud or misrep- markets to include in their coverage resentation. The PPACA also requires certain defined essential benefits. These guaranteed renewability of coverage insurers must also provide coverage that regardless of health status, utilization of has a specified actuarial value and com- health services, or any other related fac- plies with limitations set forth in the law tor. (Effective September 2010.) on cost sharing for the parties purchasing ➢ Extension of Dependent Coverage. coverage. (Effective January 2014.) Plans providing dependent coverage of children must continue to make such Expansion of Medicaid coverage available until the child turns 26 The new federal law significantly expands years of age. (Effective September 2010.) the Medicaid program. This is accomplished pri- marily by mandating coverage of certain popu- ➢ Health Insurance Premiums. Premiums lation groups not previously required, such as in the individual and group markets may childless adults. Until this mandate takes effect, vary only by family structure, geography, Medicaid beneficiaries generally have needed the actuarial value of the benefit, age, both to have a low income and to be in certain 10 LegisLative anaLyst’s Office an LaO RepORt specific categories, such as being pregnant or If the state meets federal requirements for the having a disability. Beginning January 1, 2014, establishment of this program, the federal gov- federal law will require coverage of all individu- ernment would transfer to the state 95 percent als under age 65 (children, parents, and childless of the funds that would otherwise have been adults) with incomes at or below 133 percent available to the individuals eligible for the Basic of the FPL regardless of disability or other cat- Health Plan as premium and cost-sharing subsi- egories. Furthermore, states will be eligible for dies to purchase coverage through the exchange. federal reimbursement at existing matching rates These funds would be deposited into a trust fund if they chose to expand their programs earlier and could be used to enhance benefits and re- to this new population. Taken altogether, we duce cost sharing for those enrolled in the Basic estimate various provisions of PPACA could Health Plan. ultimately add up to two million beneficiaries, or New High-Risk Insurance Pool more, to the 7.3 million now on Medi-Cal rolls. One of the major early implementation items Basic Health Plan is the establishment of a federal high-risk health Beginning on January 1, 2014, PPACA allows insurance coverage pool program. The program states the option of establishing a so-called Basic is intended to provide stopgap coverage to Health Plan as an alternative to providing cover- eligible individuals until major insurance mar- age through the exchange for certain individuals. ket changes, such as the implementation of the Specifically, the plan would provide coverage exchange, are implemented in 2014. to individuals with incomes from 134 percent to What Are High-Risk Pools? High-risk pools 200 percent of the FPL who do not qualify for are health insurance coverage programs for Medicaid or have access to employer-sponsored individuals who are generally unable to purchase coverage. The persons receiving coverage under insurance in the individual market due to a pre- a Basic Health Plan also must otherwise have existing health condition. These individuals are been eligible for coverage through the exchange. commonly referred to as hard-to-insure or medi- For example, this program would assist legal cally uninsurable. There is currently no national immigrant families with incomes that are still high-risk pool, but 35 states, including Califor- somewhat too high to qualify for Medi-Cal, even nia, currently operate their own high-risk pools. after the eligibility changes made by PPACA. Until recently, only very limited federal grant If the state chose this option, it would con- funds have been available to risk pools that meet tract with plans that provided a specified level certain federal guidelines, and California has his- of benefits and met cost-sharing limits, and torically not qualified for these funds due to the these plans would be offered as choices to Basic state’s unique benefit design. The state currently Health Plan enrollees. The contract negotiations serves approximately 7,000 individuals through would have to consider such factors as the extent its high-risk pool program, a small proportion of to which plans engaged in care coordination and medically uninsurable individuals in the state. had other attributes of managed care. New Federal Program. The new federal law directs the U.S. Secretary of Health and Hu- LegisLative anaLyst’s Office 11 an LaO RepORt man Services (HHS) to establish a high-risk pool guidance from HHS suggests that California’s program not later than 90 days after the date share of this total would equal $761 million over of enactment (March 23, 2010), and gives the the next four years, or about 15 percent of the to- Secretary the option to administer the program tal funding. At this time, it is difficult to estimate either directly or through contracts with states or precisely how many individuals could be served private nonprofit entities. On April 2, 2010, the by this level of funding. Our preliminary analysis Secretary of HHS sent a letter to states indicating indicates that this program may be able to serve that federal funds would be available beginning approximately 30,000 individuals annually. July 1, 2010 for states that choose to contract Other Opportunities to Improve with HHS to administer the program. The HHS Health Care has also asked states to declare by April 30, 2010 whether they intend to participate in the pro- Through grants and other authorized pro- gram. If the state chooses not to administer the grams, federal law includes many incentives for program, HHS is required to administer a pro- states, health providers, researchers, and others gram in that state. On April 29, 2010, the Gov- that are generally intended to help improve health ernor indicated the state’s willingness to contract care quality, access, delivery, and outcomes. with HHS to administer the new program. How- For example, federal health reform also includes ever, a contract must be finalized and legislative grants targeting improvements in emergency authority to operate the new program must be services and trauma systems. Furthermore, signifi- granted before the program is begun. cant funding opportunities are available for public The PPACA appropriates $5 billion to the health improvements and programs including state Secretary for the high-risk pool program. Initial demonstration projects for Medicaid. implicationS for StatE hEalth programS in thE nEar tErm Some of PPACA’s provisions are already in process and various new grant programs to help effect, while others will go into effect in the near during this transition period. We discuss the term. In some cases, the state will need to react ramifications for California in more detail below. quickly in order to take full advantage of chances MOE Requirements Limit to improve state health care programs and to State Budget Flexibility obtain federal funds to help carry out the new law. As summarized in Figure 2, the measure The PPACA requires the state to maintain has various implications in the short term for the eligibility standards, methodologies, and proce- state’s budget situation and the way it provides dures for Medicaid until an exchange is opera- coverage to persons who are hard to insure. We tional in the state. Similar maintenance-of-effort also discuss the near-term opportunities avail- (MOE) requirements apply to the state’s Healthy able to the state to use a federal Medicaid waiver Families Program (HFP) for children. These MOE 12 LegisLative anaLyst’s Office an LaO RepORt requirements, in effect, extend the requirements State’s Prescription Drug Rebates imposed by the American Reinvestment and Could Be Reduced Recovery Act passed in 2009 for the Medi-Cal States collect federally required Medicaid Program. They would continue to constrain the rebates from drug manufacturers in exchange Legislature’s options for reducing General Fund for allowing their products to be provided to expenditures in these programs. For example, as program beneficiaries. Many states—including part of its January “trigger” solutions, the admin- California—negotiate additional rebates, known istration proposed to achieve about $477 million as state supplemental rebates, on top of those in annual General Fund savings in 2010-11 by that are federally required. The PPACA changes excluding certain Medi-Cal beneficiaries from the the Medicaid rebate rules for prescription drugs program. This is now effectively off the table for in two major ways by (1) increasing the mini- consideration. The same is true for the Governor’s mum amount of federal rebates required from proposal to eliminate HFP. In addition, the Chil- pharmaceutical companies effective January 1, dren’s Health Insurance Program (CHIP)-funded 2010, and (2) allowing states to collect federal Access for Infants and Mothers (AIM) program rebates from managed care organizations provid- may also be preserved by these MOE provisions. ing care to beneficiaries in the Medicaid program We anticipate that additional federal guidance effective March 23, 2010. Federal law generally will clarify what types of program changes are requires states to return to the federal govern- allowable under the new federal law. ment 100 percent of the additional increase in Similar MOE restrictions could also apply minimum federal rebates. to the existing state-run high-risk pool, known These are significant changes. Currently, as the Major Risk Medical Insurance Program the state receives rebates from pharmaceutical (MRMIP). If the state contracts with HHS to companies and returns a portion to the federal operate the new federal high-risk pool program, government that is consistent with its federal a separate MOE provision would prohibit the matching percentage. The federal law change state from reducing the annual amount the state will result in a significant loss of funds to the expends for MRMIP. state because a greater percentage of the rebate amounts will be returned Figure 2 to the federal govern- Key Findings ment. This loss will be Implications for State Health Programs in the Near Term partly offset by another change in the federal law • Maintenance-of-effort requirements limit state budget flexibility in Medi-Cal and that will allow the state Healthy Families Program. to collect federal rebates • State’s Medi-Cal prescription drug rebates could be reduced. • State faces major choices regarding setup of new federal health insurance risk from state Medi-Cal pool program. managed care organiza- • Federal waiver could expedite Medi-Cal coverage expansion. tions. As a result, these • New programs and grants could generate additional federal funds. • Federal payments will be prohibited for health care-acquired conditions. new federal rules will LegisLative anaLyst’s Office 13 an LaO RepORt likely trigger changes to the state’s rebate contracts 2014. Moreover, the new program may pose and require adjustments to managed care capita- operational challenges. There are significant tion rates. Preliminary estimates from the Depart- differences between the state’s current MRMIP ment of Health Care Services (DHCS) estimate program and the new federal program regarding that the impact of these federal changes will be a benefits, eligibility, and subscriber cost sharing. net loss of $50 million General Fund annually. The state is in discussions with HHS to identify areas of flexibility, but based on the new federal State Faces Major Choices Over Setup law and current HHS guidance, it seems unlikely Of New Federal Risk Pool Program that the state can merge its existing high-risk pool As noted earlier, the state currently operates program with the new federal program without MRMIP, its own high-risk pool program. It now making significant changes to existing programs. faces the choice of stepping in to also operate For example, the federal program requires that a similar new federal program, assigning that individuals be uninsured for six months prior to responsibility to a nonprofit entity, or leaving it to applying for coverage, whereas the state program the federal government to administer such a pro- has no such requirement. Finally, as mentioned gram within California. While the administration above, an MOE requirement would limit the has indicated its intent to the federal government state’s flexibility to reduce state spending on its that the state operate the new high-risk pool itself, hard-to-insure population. many steps remain before this decision is final. Thus, regardless of whether the state chooses The Legislature should consider some sig- to administer the program, it seems likely that nificant tradeoffs as it weighs what approach to there will be a new federal program operating take. Administering the new program directly alongside the existing high-risk pool programs. would give the state more control over the pro- Regardless of whether the state chooses to gram, may result in more rapid implementation, administer the pool directly, there may be ways and offers the state a better opportunity to inte- to modify MRMIP in order to optimize cover- grate the new program with its existing programs. age for hard-to-insure Californians once the new While the HHS intends to offer an option directly pool is operational. For example, MRMIP eligibil- to hard-to-insure individuals in states that do not ity could be restricted to future applicants who choose to administer a program themselves, it is do not qualify for the federal program, thereby unclear at this time what type of program HHS preserving limited state funding in order to assist will offer to these individuals and when it would those who cannot purchase coverage elsewhere. be implemented. Federal Waiver Could Expedite On the other hand, the Legislature should Expansion of Medi-Cal Coverage consider potential challenges the state may face should it choose to administer the program. As noted above, the state has the option to Although the program is supposed to be en- expand Medi-Cal to non-elderly adults and chil- tirely federally funded, it is not yet clear that dren up to 133 percent FPL before the 2014 date the $5 billion appropriated in PPACA for this when such coverage will become mandatory. program nationally will be sufficient to last until However, the federal government’s funding con- 14 LegisLative anaLyst’s Office an LaO RepORt tribution for the cost of these individuals would formula, others awarded through a grant applica- be at the state’s current federal matching per- tion process. Given the significant fiscal chal- centage. This will be 50 percent of benefit costs, lenges ahead for the state, it will be important as of December 2010, unless a higher federal for the Legislature to ensure that state agencies contribution rate is extended by federal law. The maximize their opportunity to obtain additional 100 percent federal matching rate allowed under federal funds, particularly in cases where doing PPACA for “newly eligibles” would not take ef- so could offset state General Fund costs or assist fect until 2014. Such an early expansion of Medi- the state with the transformation of California’s Cal eligibility would be costly and difficult for the health care system under PPACA. We discuss state to achieve, especially given the state’s now some of these opportunities in more detail in the dire fiscal situation. However, it may be possible box on page 18. for the state to roll out some or all of the expan- Federal Payments Prohibited for sion on an earlier timetable using federal funding Health Care-Acquired Conditions obtained through a federal “waiver” program. We provide more information about how waiver Federal reimbursement to the state for health programs work, and discuss this option to use care-acquired conditions will be prohibited the waiver to allow a better transition to the under the new federal law effective July 1, 2011. expansion of coverage required by 2014, in more This term generally refers to conditions, such as detail in the box on the next page. an operation on the wrong body part and certain infections, that were caused by poor care of pa- New Programs Could Generate tients or failure to follow guidelines or standards Additional Federal Health Care Funds of patient care. The measure directs the federal As discussed in more detail later in this government to identify current state practices analysis, the state’s implementation of PPACA that prohibit payments for such conditions and could result in some significant increases in state apply these practices, as determined appropri- health program costs. However, the new federal ate, to the entire Medicaid program. The state law also establishes a number of new federal will need to conform to these requirements to grant programs—some monies distributed by achieve state cost savings in this area. thE long-tErm implicationS for StatE hEalth programS Some provisions of PPACA will take effect be taken to implement some of these measures. almost immediately, but will take time to have By beginning the planning process far in ad- a major effect on state health care programs. vance of the implementation dates prescribed in Others will not go into effect at all for two or PPACA, the Legislature can ensure that it is mak- three years or more. Nevertheless, in a number ing informed decisions and allowing a smooth of cases, it will be important for the Legislature to and more efficient implementation of the new begin considering soon what initial steps should federal law. LegisLative anaLyst’s Office 15 an LaO RepORt W I s 1115 W ? HAt s tHe eCtIon AIver Medicaid 1115 Waivers Allow Flexibility and Provide Federal Funding. The federal govern- ment generally grants states flexibility in administering their Medicaid programs through “waiv- ers,” such as those allowed under Section 1115 of the federal Social Security Act. These permit a state to waive certain requirements, in order to further the purposes of the program. Addition- ally, under 1115 waivers federal funds can be used for program costs that might not otherwise be federally reimbursable. These waivers are typically approved for five-year periods. Many states have used 1115 waivers in their Medicaid programs to test new approaches to expand coverage and benefits. California’s 1115 Waiver Will Expire in August 2010. California currently has an 1115 waiver, also commonly called the “hospital financing waiver,” that was approved by federal authorities in June 2005 and implemented through Chapter 560, Statutes of 2005 (SB 1100, Pe- rata). California’s current 1115 waiver expires on August 31, 2010, and renewal negotiations are currently in progress. Key components of the current 1115 waiver include: ➢ Financing for designated public hospitals primarily by requiring the use of certified public expenditures, instead of the state General Fund or other funds, to meet federal matching payments. ➢ Funding for uncompensated hospital care to support a “safety net care pool” estab- lished by the waiver to assist uninsured persons, as well as changes in so-called dispro- portionate share hospital funding that assists hospitals that care for a high number of Medi-Cal beneficiaries and the uninsured. ➢ Support for certain state-funded programs including the Medi-Cal Breast and Cervical Cancer Treatment Program and California Children’s Services. Monies are also available under the waiver to expand health care coverage for uninsured adults not eligible for Medi-Cal, under what are known as Health Care Coverage Initiatives (HCCI) established in ten counties, and to expand Medi-Cal managed care. Next Waiver Could Help Finance PPACA Implementation. Given California’s tight fiscal situation and limited resources, the waiver currently being developed is an opportunity for the state to think strategically about how to maximize federal funding to implement the require- ments and options provided under federal Patient Protection and Affordable Care Act (PPACA). For example, many of the individuals currently participating in the HCCIs will be eligible for the Medi-Cal Program under federal coverage rules that take effect in 2014. The administration proposes to expand these coverage initiatives statewide as part of the next waiver. Using the HCCIs as a transitional tool for statewide implementation of the required Medicaid expansion is one way the state may be able to address implementation costs while also maximizing federal funds—if federal authorities agree to these changes. 16 LegisLative anaLyst’s Office an LaO RepORt In reviewing the long-term implications of Nevertheless, these required changes will put the new law for state health programs, we identi- significant fiscal pressure on the state in the out- fied a number of significant issues. For example, years, particularly as the enhanced federal fund- our analysis indicates that the measure contains ing is somewhat reduced. The exact cost to the a number of provisions that could increase state state of these provisions cannot be determined costs, eventually by the low billions of dollars with precision at this time because in a number annually. Funding for certain hospitals will be of cases (1) federal authorities have not issued affected. The state will face challenges in coor- federal regulations and other types of guidance dinating the new health benefits exchange with that could greatly affect the way they are imple- other state health programs and in changing mented, and (2) the state has some leeway in eligibility processes to conform to new federal how these federal mandates are implemented. requirements. Further changes will need to be Nonetheless, our initial assessment is that the considered in children’s health coverage and state eventually faces the risk of additional state high-risk pools, as well as the provision of cover- costs in the low billions of dollars annually. (We age to those who remain uninsured. We sum- note that our estimate does not take into account marize these long-term implications of PPACA in other possible beneficial or negative fiscal effects Figure 3 and explore them in more detail below. of PPACA outside of its impact on state health care programs, such as changes that could affect Expansion Will Substantially Increase state costs for health coverage for state employ- Future State Medi-Cal Program Costs ees or that could increase state insurance pre- Additional Medi-Cal Costs May Eventually mium tax revenues.) Be in the Low Billions of Dollars. Many of the Below, we describe several major changes major health reform provisions impacting Medi- to the state Medi-Cal Program that are likely to Cal take effect in 2014. These include eligibility result in: (1) increased enrollment by individuals expansions, as well as changes in how the state currently eligible but not enrolled in the pro- determines program eligibility and payments for gram, (2) expansion of eligibility to persons up to services. For some of these requirements, the 133 percent of the FPL, (3) expansion of cover- federal government has provided enhanced fund- age to former foster children, and (4) increased ing to facilitate the state’s implementation. payments to primary care providers. We also provide our preliminary Figure 3 estimates, where pos- Key Findings sible, of the implications Implications for State Health Programs in the Long Term for future state costs. Increased Medi-Cal • Expansion will substantially increase state Medi-Cal Program costs. Enrollment by Persons • Reduction in federal hospital funding could affect some hospitals. • New exchange needs integration with other programs. Currently Eligible, but • Changes will be required in Medicaid eligibility processing. Not Enrolled. It is likely • Coverage for some children could be shifted to the exchange. that the new individual • State and federal high-risk insurance pools could eventually be phased out. • Certain populations will continue to be uninsured. mandate for health insur- LegisLative anaLyst’s Office 17 an LaO RepORt ance, which takes effect in 2014, will increase reasons, it is still unclear how effective the new the demand for Medi-Cal by persons who are individual mandates for coverage will be, and currently eligible, but have chosen not to be how aggressively federal authorities will enforce enrolled in the program. It is impossible to know these requirements. In our analysis, we assumed exactly when the state would begin to experi- that these mandates for individuals to obtain ence the full impact of these additional enroll- coverage will eventually have a significant effect ments in Medi-Cal. This is because, among other on the Medi-Cal caseload. PPACA C n f f o reAtes eW ederAl undIng PPortunItIes A number of new federal funding opportunities were created by the new federal law, in- cluding the following: Medical Homes for Persons With Significant Health Needs. States can receive additional federal funding to provide comprehensive care management and transitional services to Medic- aid beneficiaries with certain chronic conditions if the individual’s care is coordinated through a “medical home.” Medical homes are proposed as a model of care where a person’s care is coordinated through a central hub rather than a person being directed to seek care from a jumbled network of providers. Support is available at a 90 percent federal and 10 percent state funding rate beginning in 2011. Optional Attendant Services Benefit. Beginning in 2011, states can establish an optional Medicaid benefit to offer community-based attendant services and supports, such as assistance to accomplish activities of daily living. States that chose this option will receive an enhanced federal match of 6 additional percentage points. Bundled Payments for Care Around Hospitalization. Up to eight states will have the opportunity to test using bundled payments for the provision of integrated care to Medicaid beneficiaries beginning in 2012. Bundled payments are an alternative to fee-for-service pay- ments, in which each physician receives reimbursement for the individual services provided. In contrast, a bundled payment makes a single payment for all services related to a treatment or condition, possibly spanning multiple providers in multiple settings, such as the hospital and follow-up care in a physician’s office. Incentives for Pediatric Accountable Care Organizations (ACOs). States can participate in a Medicaid project that allows pediatric medical providers to be recognized as an ACO. An ACO is a local health care organization with a set of related providers (at a minimum, primary care, physicians, specialists, and hospitals) that can be collectively held accountable for the cost and quality of care delivered to a defined population. The intent of an ACO is to reduce costs by delivering coordinated care. This project is authorized in 2012 through 2016. Additional Funding for Primary Care Clinics. It is estimated that the approximately 1,100 federally funded community health centers, or clinics, in California will receive $1.4 billion 18 LegisLative anaLyst’s Office an LaO RepORt It is important to note, however, that while currently eligible enrollees would be 50-50. We the state will receive 100 percent federal funding estimate that this increase in enrollment could to expand Medi-Cal to certain new populations eventually cost the state in the high hundreds beginning in 2014, it will not receive this high of millions of dollars annually. However, actual federal cost-sharing ratio for persons eligible but costs could be significantly higher or lower than not enrolled under today’s eligibility require- we estimated, and would depend on such key ments. The ongoing state-federal split of costs for factors as the rate at which additional eligible PPACA Creates New Federal Funding Opportunities (continued) in new funding over five years. These funds are available to expand operations to serve more patients and for capital improvements to build new facilities and expand existing ones. The new federal funds could help relieve fiscal pressure on the state to maintain funding for uncompen- sated care historically provided by these clinics. Prevention and Public Health Fund. The Patient Protection and Affordable Care Act (PPACA) appropriated $500 million in the 2009-10 federal fiscal year to a new Prevention and Public Health Fund, which is intended to provide ongoing support to public health and pre- vention programs at the national, state, and local levels. These funds can be used to promote community-based preventive health activities as well as other activities permitted under the previously enacted Public Health Services Act (such as immunizations, public health prepared- ness, and cancer detection programs). The PPACA also appropriates additional money for this fund in future federal fiscal years: $750 million in 2010-11, $1 billion in 2011-12, $1.25 billion in 2012-13, $1.5 billion in 2013-14, and $2 billion annually in 2014-15 and beyond. Maternal, Infant, and Early Childhood Home Visiting Program. The PPACA appropriates $100 million for the 2009-10 federal fiscal year for state Maternal, Infant, and Early Childhood Home Visiting Programs. Specifically, the measure authorizes grants for home visitation pro- grams following models that have been proven to improve health outcomes for mothers and babies. Home visitation programs provide low-income pregnant and parenting families such services as smoking cessation programs, advice on nutrition and exercise, basic information on newborn care and child development, and family planning. The PPACA also appropriates addi- tional funding for this program in future years: $250 million in 2010-11, $350 million in 2011-12, and $400 million annually in 2012-13 and 2013-14. Planning Grants for Health Benefit Exchange. Should the Legislature decide to establish such a health benefits exchange, the state could apply for federal grants that will be available to offset the costs of planning and establishment of such an entity. Later in this analysis, we discuss some of the long-term planning issues associated with the development of an exchange system in California. LegisLative anaLyst’s Office 19 an LaO RepORt persons enrolled in the program and the cost of dollars. The state’s actual share of these costs the services provided to them. would depend on the federal matching rate that Expanded Eligibility to 133 Percent FPL. As is ultimately determined to apply to these new noted earlier, beginning January 1, 2014, PPACA beneficiaries. requires expansion of eligibility to all individu- Increased Primary Care Provider Payments. als under age 65 (children, parents, and childless Currently, it is estimated that the Medi-Cal rates adults) with incomes at or below 133 percent paid to physicians are, on average, about 60 per- FPL. (After taking into account a technical adjust- cent of Medicare rates. Under the new federal ment to eligibility required under the federal law, law, payments made to physicians and managed the income limit is about 138 percent of the FPL.) care organizations for primary services provided As shown in Figure 4, the federal matching rate by primary care doctors must be at least 100 per- for coverage of this expansion population will cent of Medicare rates in 2013 and 2014. The slowly decline between 2014 and 2020, with federal government will pay 100 percent of the the state eventually bearing 10 percent of the incremental cost in these two years; thereafter, the additional cost of this program expansion. Early state would have to maintain the higher rate on its estimates indicate that up to two million addi- own or reduce rates. However, it is possible that tional people could be enrolled in Medi-Cal as a California will be required to maintain the greater result of the expansion of eligibility. We believe level of reimbursement rates, given the history of that this newly eligible population would cost legal cases that have thwarted or hindered past the state several hundreds of millions of dollars budgetary efforts to reduce Medi-Cal provider annually upon the full implementation of this rates. If the state were subsequently unable to provision for its 10 percent share of benefit costs. scale back the rate increases required in 2013 and Again, actual costs could vary significantly from 2014 because of intervention by the courts, this our estimates, depending on the rate of enroll- new provision could potentially cost the state hun- ment and the cost of the services provided. dreds of millions of dollars annually in the future. Expanded Coverage for Former Foster Children. The PPACA creates a new manda- Figure 4 tory Medicaid eligibility category by requiring Federal Funding for coverage for former foster children up to age 26 Newly Eligible Populations beginning January 1, 2014. These children may Federal Medical have incomes greater than 133 percent of FPL Assistance but they must have been in state foster care at Calendar Year Percentage (FMAP) age 18 or older. These individuals are eligible for 2014 100% all children’s benefits, including specialty mental 2015 100 2016 100 health coverage available under a federal man- 2017 95 date for Early and Periodic Screening, Diagnosis, 2018 94 and Treatment. These costs would probably 2019 93 2020 and thereafter 90 eventually amount to the low tens of millions of 20 LegisLative anaLyst’s Office an LaO RepORt Reduction in DSH Funding Could will need to consider the impact of these reduc- Affect Some Hospitals tions on the total resources available for hospi- tals’ uncompensated care. As noted above, the federal government an- nually provides capped federal funds, known as Legislature Has Policy Options on the DSH funds, to hospitals that serve a dispropor- Design and Role of the Exchange tionate share of the Medicaid beneficiaries and As we previously discussed, the PPACA uninsured. Medicaid DSH payments in federal requires that a health insurance exchange be es- fiscal year (FFY) 2008-09 nationally were about tablished in each state. Our preliminary analysis $11.3 billion. Currently, California receives over of this complex component of PPACA indicates $1 billion in Medi-Cal federal DSH payments that the Legislature has an important opportu- annually. nity to determine what form the exchange takes, Beginning in FFY 2013-14, PPACA requires how it is governed, and the role it should play in over several years an $18.1 billion total reduc- California’s health care marketplace. We elabo- tion in the Medicaid DSH allocations now being rate on each of these key policy considerations made to states, as shown in Figure 5. The reduc- below. tion to each individual state is to be based on a Should the State Establish an Exchange? methodology to be determined by the federal Under the new federal law, states have the op- government that takes into account the state’s un- tion of establishing the exchange or allowing the insurance rate, its volume of Medicaid inpatients, federal government to do so. If the state does and the amount of uncompensated care that is establish the exchange, it may operate it directly provided. through a state department or assign this respon- The main fiscal impact of this change will be sibility to a nonprofit entity. It may also establish felt by counties that operate DSH-supported hos- multiple exchanges within the state or join with pitals. However, because these hospitals are an other states in creating an exchange. important component of the health care delivery Leaving the creation of an exchange to the system of the Medi-Cal Program, the Legislature federal government would relieve the state of a Figure 5 formidable administrative task. However, estab- Medicaid Disproportionate Share lishing it as a state entity in some form has some Hospital Funding Reductions important potential advantages that the Legis- (In Millions) lature may wish to consider. The state would Federal Fiscal Year Reduction Amount be able to design the exchange to address any unique features of California’s insurance mar- 2013-14 $500 2014-15 600 ketplace, for example, and would also have the 2015-16 600 flexibility to modify the exchange as needed to 2016-17 1,800 respond to market conditions. It would also be 2017-18 5,000 2018-19 5,600 in a stronger position to ensure that the activities 2019-20 4,000 of the exchange are well-coordinated with the Total $18,100 state’s existing health care programs. LegisLative anaLyst’s Office 21 an LaO RepORt These same considerations probably make it exchange, such as by requiring public meetings unlikely that the state will want to consolidate a of the board. California-operated exchange with those in other What Role Should the Exchange Play in states. Similarly, creating multiple exchanges the Health Insurance Market? The new federal within California, as permitted by PPACA, would law provides the Legislature a significant degree allow more local autonomy for such operations, of flexibility to decide what type of exchange it but also likely poses some significant problems. wishes to establish. This role could range from For example, this approach would likely increase being a “connector” to a “purchaser” of cover- the overall administrative costs and complex- age. More specifically, the exchange could have ity of a California exchange system. Because its the more limited role of connecting eligible operations and policies would inherently be less persons to coverage via an Internet portal that uniform, a multi-exchange approach would prob- provided standardized information on qualified ably be less likely to carry out the Legislature’s plans and prices and then referred individu- statewide policy goals for the exchanges. als and employers to the plan of their choice. How Would An Exchange Be Governed? Alternatively, the exchange would play a more Another critical decision for the Legislature is expansive role and operate as a purchasing al- the governance structure of the exchange. The liance, negotiating the best rates for exchange insurance exchange could be placed under participants and enrolling individuals in plans, as the authority of an independent public agency well as administering subsidies, collecting and governed by a state board, akin to the Man- paying premiums. aged Risk Medical Insurance Board (MRMIB) A purchasing alliance could allow the ex- that oversees the state’s HFP. The MRMIB is change to flex its negotiating power on behalf of subject to a high degree of legislative control a large number of potential enrollees. In theory, as well as direct oversight and accountability. health insurers and provider networks would One tradeoff, however, is that this model would have a stronger incentive to discount their rates make the exchange subject to the state budget under such an arrangement. Administrative costs process as well as other governmental processes per enrollee might also be lower, since the fixed that might make the entity less flexible. Alterna- costs of such an operation would be shared tively, the Legislature may wish to consider more among a larger number of enrollees. On the of a public-private partnership model, akin to other hand, it is by no means a certainty that the State Compensation Insurance Fund (SCIF), this more expansive involvement in the health which offers workers’ compensation insurance care marketplace would achieve these desired policies. The SCIF model would seem to offer the results in the long term. A more limited operation exchange greater flexibility and ability to respond that made it easier for consumers to compare quickly to changes in the insurance marketplace the features and price of policies—making the but, conversely, less legislative control. Under marketplace more transparent—may be sufficient either approach, it would be important for the to achieve the desired purpose of creating more Legislature to establish a high degree of transpar- competition in the health insurance marketplace. ency and accountability in the operations of the 22 LegisLative anaLyst’s Office an LaO RepORt In evaluating these policy issues, it will be Families Program) through September 30, 2015 important for the Legislature to also examine the (an additional two years as compared to current existing state laws that govern the individual and law) and authorizes the operation of the pro- group health insurance markets. Among other gram through the 2018-19 FFY. The PPACA also issues, it should consider whether those laws will provides states a 23 percentage point increase need to be changed to help ensure the success of in the CHIP match rate from 2016 through 2019, the type of exchange it may choose to establish. increasing California’s federal matching rate for CHIP from 65 to 88 percent. This change would Changes Will Be Required in result in state savings in the hundreds of millions Medicaid Eligibility Processes of dollars annually in those years, provided that The PPACA makes several changes to how funding is reauthorized for this purpose. states determine Medicaid program eligibility that The PPACA also includes provisions that generally simplify these processes and, in some allow states to enroll CHIP-eligible children into cases, make program eligibility more gener- plans offered through the exchange, under cer- ous. Most changes take effect January 1, 2014. tain conditions. This could occur before It is unclear at this point whether some of these October 1, 2015, if the state exhausts its federal changes could make eligibility more restrictive. funding for CHIP; or after October 1, 2015, if the At this time, the net fiscal impact of these chang- state (1) ensures that the children are not Medi- es is unknown. These required changes include: Cal eligible, and (2) that plans available through ➢ Standardization of income determination the exchange provide benefits and limits on cost sharing comparable to those provided through by requiring the use of a new income HFP. standard, known as Modified Adjusted These provisions appear to be specific to Gross Income (MAGI), to establish children covered under CHIP-funded programs. eligibility for certain individuals. As part At this time, it is unclear whether or when Cali- of this change, various deductions to ap- fornia could eventually enroll pregnant women plicant income that are now permissible currently covered through the CHIP-funded AIM would end. into plans offered through the exchange. ➢ Asset tests for certain individuals to de- termine their eligibility will be eliminated. State and Federal High-Risk Pools Could Eventually Be Phased Out ➢ Enrollment procedures must be simpli- As described earlier in this report, the state fied and coordinated with the state-based has the option to contract with the federal exchange and the HFP. government (HHS) to administer the new federal high-risk pool program. A MOE requirement Coverage for Some Children will apply that prevents the state from reducing Could Be Shifted to Exchanges spending on high-risk pools in the budget year. The PPACA extends funding for the fed- It is likely, though not certain at this time, that eral CHIP, (known in California as the Healthy LegisLative anaLyst’s Office 23 an LaO RepORt this MOE will also apply in some form during the Certain Populations Will Continue period of 2010-11 through 2013-14. To Be Uninsured Under the new federal law, funding for the Under federal health care reform, certain new federal high-risk pool will cease in 2014. populations—such as undocumented per- This would also probably be the point in time sons—will continue to be ineligible for Medi-Cal at which the state could discontinue the state (except for emergency medical assistance and MRMIP program without violating MOE require- certain other services) and will be prohibited ments. Moreover, it is widely anticipated that, from purchasing coverage from the new health by January 1, 2014, neither the state’s current insurance exchanges. It is estimated that Califor- MRMIP program nor the federal high-risk pool nia has 1.2 million uninsured, undocumented will be needed any longer. At that point, un- immigrants. An unknown, but likely substantial, der the insurance-related provisions of PPACA, number of other individuals are likely to remain insurance companies will be required to issue uninsured despite the enactment of the new fed- a policy to anyone who applies. The premiums eral mandate that they obtain health coverage. charged could not take into account their medi- Some will be determined eligible for hardship cal condition and subsidies would be available exemptions, while others will probably remain through the exchange to make coverage more uninsured for a variety of reasons. One key issue affordable. The Legislature may wish to act well for the Legislature to consider is where and how before 2014 to ensure that there is an orderly individuals who are uninsured will be provided phase-out of the state program and a careful care, and how such care will be paid for when transition of individuals with serious medical the patient is indigent. We discuss this issue in conditions to private coverage. more detail in the next section. thinking Broadly aBout implEmEnting thE nEw fEdEral law Beyond responding to the specific require- ship regarding the delivery and funding of health ments in the new federal health care law, as we care services. Other broader issues before the have discussed earlier in this report, the Legisla- Legislature include how PPACA can be used as an ture should “step back” and think broadly about opportunity to improve the quality of the care that the state’s role in the implementation of expanded is provided and ensure the adequacy of the state’s health insurance coverage over the next few years. health care workforce and medical infrastructure. In carrying out and adapting to the new federal Figure 6 summarizes these issues. We elaborate law, for example, the Legislature has the opportu- on these matters below. nity to improve both the fiscal sustainability and Addressing Future Costs for structure of the state’s patchwork of state pro- State Health Programs grams. The new federal law makes it essential that In general, growth in state health programs the Legislature reexamine the state-local relation- has outpaced growth in the state’s revenues. As 24 LegisLative anaLyst’s Office an LaO RepORt we highlighted in our 2010-11 budget report, the Legislature could seek to use funds that Health and Social Services Budget Primer, total are now dedicated to various health programs spending for the major health departments (in- through past ballot measures to the state’s advan- cluding DHCS, MRMIB, the Department of De- tage to restructure financing for health programs. velopmental Services, the Department of Mental Specifically, some of the additional state income Health, and the Department of Public Health) tax revenues made available under Proposi- has increased from $24.5 billion in 1999-00 to tion 63 for community mental health programs an estimated $57.8 billion in 2009-10. This is an could in theory be tapped to help pay for spe- increase of $34 billion, or 136 percent, over the cialty mental health services for lower-income ten-year period. The primary cost drivers for this persons who would now qualify for Medi-Cal growth are increased costs and utilization of ser- services. The Legislature should consider this and vices and caseload growth. Given this growth, it other such opportunities to maximize the use of is important that, as the Legislature takes actions federal funds and minimize General Fund spend- to implement PPACA, it considers strategies that ing to implement PPACA. would help to make the state’s health programs Leverage State’s Purchasing Power. The as efficient as possible. Below, we briefly discuss state’s current approach to purchasing health some strategies with this purpose that we think care services for people enrolled in state pro- are worthy of further consideration. grams is fragmented. We estimate that the state Maximize Receipt of Federal Funds, Mini- covers roughly 9.5 million lives through health mize Use of General Fund. The Legislature care plans in Medi-Cal (7.3 million), the HFP should consider using federal funds to the great- (900,000), and the California Public Employees’ est extent possible to carry out PPACA, with state Retirement System (1.3 million). However, even General Fund resources used as a last resort. We though some of the same health plans serve each believe there may be additional opportunities to of these groups of beneficiaries, the state sepa- match the myriad of currently available funding rately negotiates rates with health care plans for streams—including funds generated as a result each of these programs. As the state implements of past ballot measures—to draw down federal PPACA, the number of covered lives in Medi- funds to implement the new law. For example, Cal, in particular, is likely to grow even more, adding even more to the state’s bargaining power. Figure 6 Our analysis indicates Key Findings Thinking Broadly About Implementing the that there may be some New Federal Law significant opportunities for the state to leverage • Future costs for health programs should be addressed. its purchasing power by • Structural changes to state health programs are warranted. consolidating its pur- • The PPACA should prompt a reevaluation of the state-local relationship. chases of health care • New strategies could bolster health care quality and outcomes. • Future workforce and health infrastructure needs should be assessed. services for these various PPACA=Patient Protection and Affordable Care Act. state programs, thereby LegisLative anaLyst’s Office 25 an LaO RepORt enabling a more efficient implementation of the that PPACA provides an opportunity for the Leg- new federal law. islature to reexamine the structure of the state’s Consider Revenue Sources. One way to health programs going forward. help finance the implementation of the changes The dramatic expansion in access to compre- required by PPACA would be to identify revenue hensive health care coverage envisioned by sources that could help offset state costs for PPACA will likely eliminate the need for some these federally mandated activities. For example, health programs and significantly change oth- the existing fee on hospitals that expires this year ers. For example, some disease- or population- could be extended and used to fund the imple- specific programs may prove to be less important mentation of health care reform. to continue given the much wider availability of Reduce Cost of Care for High-Cost Individu- public and private coverage that, under the new als. The cost of health care for some individuals, federal law, must provide comprehensive cover- such as seniors and persons with disabilities, age. Likewise, as the state responsibility to provide is relatively high because of their sometimes- coverage to certain populations expands, local extensive health care needs. Yet, the number responsibilities to do the same may contract. After of such individuals enrolled in Medi-Cal could full implementation of the new law, some gaps in grow significantly in future years because of the coverage will remain, but they will be narrower. mandate that all individuals obtain health cov- Thus, the modification, phase-out, or outright erage. We believe that one way to help offset elimination of certain existing programs will be these potential additional costs is to continue to key legislative considerations over the next sev- expand programs to improve the coordination of eral years. The Legislature should also consider the health care of the high-cost medical popula- the implications of these programmatic changes tion. For example, as we have recommended in for the administrative and information technology the past, the state could enroll additional seniors structures that support these programs. and persons with disabilities in systems of care, PPACA Should Prompt Reevaluation such as managed care. In addition to potentially Of the State-Local Relationship having beneficial fiscal effects, these changes could also improve the quality of their care. In California, local governments, primarily counties, share the responsibility with the state Structural Changes to State Health for the delivery of health care services. Counties Programs Are Warranted are statutorily required under Welfare and Institu- The new framework for the expansion of tions Code Section 17000 to provide health care health insurance has broad implications for for indigents, a population now consisting mainly the structure and function of the state’s health of childless adults but also including children. care programs. The current patchwork of public The expansion of health coverage and mandate programs has evolved over decades, largely in for individuals to maintain coverage required by response to federal funding opportunities and the PPACA has the potential to significantly reduce identification of gaps in health care coverage for the number of indigent adults in the state without various populations and conditions. We believe health insurance coverage and reduce the finan- 26 LegisLative anaLyst’s Office an LaO RepORt cial burden on counties. In light of this and other ➢ Fragmentation of services and a lack of effects of the new federal law on county respon- care coordination among providers. sibilities for providing health care services, it will ➢ Treating diseases, but not necessarily be important for the Legislature to consider the focusing on improving the overall health state and local relationship as part of its delibera- of patients. tions on the implementation of PPACA. The administration and financing of various ➢ Financial incentives that reward the health programs has evolved over the years in quantity of services provided rather than response to fiscal crises and efforts to achieve the quality of that care. better program outcomes. The existing allocation The PPACA makes available various grants of state and local responsibilities and funding for and demonstration project opportunities to health and social services programs is complex, assist states in addressing these problems. For and reflects, in part, the programmatic and fiscal example, certain demonstration projects provide circumstances that existed during the mid-1970s. the opportunity for states to reduce their reliance The 1991 legislation to realign state and local on paying providers for each service delivered funding and program responsibilities to the coun- (also known as fee-for-service) and expanding ties represents the last time the Legislature took a the use of new payment structures that provide a hard look at how state and local responsibilities fixed rate to providers or health plans to manage for health care are divided. Since that time, state all the health care an individual requires. Such and local programs have changed. For example, models may improve coordination of care, and in 2004 voters passed Proposition 63, which pro- result in better health outcomes. Other grant vided a significant new source of funding for the opportunities, such as the Maternal and Child expansion of local mental health services. Home Visiting Program described earlier, attempt In the past, we have recommended the Legis- to improve the health and well-being of target lature align program responsibilities and funding populations, in order to detect health problems in a way that promotes program efficiency, ef- early and prevent other health problems from fectiveness, and accountability. These principles developing. will continue to be a useful guide for the Leg- In addition to these two, many other preven- islature, especially as it makes decisions about tion programs and demonstration projects are which level of government will be responsible for authorized in PPACA. Taken together, these new providing health care services to populations that opportunities will provide a variety of ways for are either not eligible for health insurance or for states to experiment with strategies to improve other reasons remain uninsured. health outcomes for the populations they serve, New Strategies Could Bolster Health by providing appropriate incentives for quality Care Quality and Outcomes care and an increased focus on early detection and prevention of disease. Eventually, if dem- Many systemic problems have been iden- onstration programs prove successful, the state tified in the nation’s health care system that may be able to drive changes in the health care include: LegisLative anaLyst’s Office 27 an LaO RepORt marketplace that improve the quality of care and Workforce Capacity Pressures. A number of health outcomes broadly. studies report that California’s health care work- In assessing these opportunities, the Legisla- force in certain localities and specialties, such as ture should critically evaluate the capacity of the primary care, nursing, and behavioral health, is state to successfully administer new programs already in short supply. The Legislature will need and the potential benefit of the program to the to consider the number, type, and distribution state. In some cases, additional state resources of California’s health care professionals and how may be required up front in order to apply for well they can meet the current and future needs and administer new programs. These up-front of Californians. The Legislature will also need costs should be balanced with long-term goals of to consider how well it is educating, training, improving health and purchasing higher-quality recruiting, and retaining health professionals, care. As more details become available, the Leg- particularly those needed for preventative and islature may also wish to express preferences in primary care given PPACA’s focus to promote prioritizing some opportunities over others. these services. Infrastructure and Other Issues. Access to Future Workforce and Health health care will also depend on the adequacy Infrastructure Needs of the state’s health care infrastructure, such as Should Be Assessed clinics and hospitals, as well as on the avail- The individual mandate and expanded cover- able technological resources and systems. For age options created under PPACA will likely create example, certain rural areas in California already a surge in demand for health care services state- have limited access to hospitals and trauma wide. However, health coverage alone does not centers. The Legislature will need to grapple with ensure access to health care services. Individuals how well the current infrastructure will be able who have a source of payment for care may still to meet the needs of Californians once the new be unable to find a provider to meet their needs. federal health care law is implemented. It should Successful implementation of federal health care also consider the role of alternative ways to deliv- reform will depend on the state’s response to ac- er health care services, such as telemedicine. cess issues including workforce and infrastructure capacity, as well as the regional variation of sup- ply of health services described below. LAO Publications This report was prepared by the Health Section (Shawn Martin, Farra Bracht, Greg Jolivette, Lisa Murawski, and Meredith Wurden). The Legislative Analyst’s Office (LAO) is a nonpartisan office which provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an E-mail subscription service, are available on the LAO’s Internet site at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 28 LegisLative anaLyst’s Office